Expect higher market volatility: After a period of plentiful fiscal and monetary liquidity due to the pandemic, the specter of less liquidity going forward may continue to weigh on markets, especially stocks of companies that have relied on liquidity rather than earnings for multiple expansion.
Think about upgrading your equity portfolio: With this month’s market sell-off, many investors are finding opportunities in higher-quality companies with growing revenues and profits at potentially attractive entry points.
Diversify your equity exposure: Investor portfolios appear to be still biased toward growth equities, as the market share in large-cap growth mutual funds is currently around twice that of value funds (according to Morningstar). Asset allocators should consider shifting some of their growth exposure to value, where (as noted) I expect continued outperformance.
Respect the possibility of regime change: No one can know if “this time is different,” but given today’s backdrop of higher, “stickier” inflation, policy tightening, and geopolitical risks, I believe it is prudent to be prepared for that possibility and to favor real assets, value-oriented equities, commodities, floating-rate credit, and TIPS over US Treasuries.